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China Games

China's crazy accounting moves mask the United States' reliance.

I've wanted to write an article for a while quieting the constant screech of those who say the U.S. is overly reliant on China to buy our debt.

I thought I had it nailed after coming up with this chart:

Source: U.S. Treasury.

See? China actually sold U.S. Treasuries last year. If you want to worry about reliance on a foreign banker, worry about the Brits. They're the largest foreign buyer of our debt by far, buying more than a third of a trillion dollars worth of the stuff last year alone. The U.K., an economy one-seventh the size of the U.S., supplies nearly one-quarter of our debt.

But wait a minute … this smells fishy. How can China, with a $252 billion trade surplus against the U.S., keep its currency undervalued while dumping Treasuries? I suppose it's technically possible. China has been known to plow a few dollars into non-Treasury dollar-denominated investments. Still, fishy. And why, too, would the U.K., a country with an almost flat balance of trade with the U.S., plow more than 15% of its GDP into Treasuries? Really fishy.

Floyd Norris from TheNew York Times seems to have figured it out (emphasis mine):

It is not easy to see how the Chinese government managed to keep its currency from rising more rapidly against the dollar if it did not continue buying Treasuries in 2010, and there has been speculation that it shifted purchases to accounts managed by British money managers. If so, such purchases would show up as British purchases.

If Norris is even half-right, I give in: The worriers are probably correct. The U.S. is indeed dangerously reliant on China to buy its debt. If he's not, it hardly matters; it just means we're reliant on the U.K. to buy our debt. The real risk -- being reliant on the kindness of strangers -- doesn't change; it just shifts hands.

But what incentive does China have in hiding its purchase? This makes it easier for it to insist it isn't grossly manipulating its currency lower -- a charge Washington has been banging a drum against lately. By selling yuan and buying dollars, China keeps its currency depressed, cheapening its exports and boosting its domestic economy. This comes at a disadvantage to U.S. companies doing business in China, such as Coca-Cola(NYSE: KO) and Yum! Brands(NYSE: YUM), and in general gums up international trade.

Treasury Secretary Tim Geithner recently said, "China of course presents enormous economic opportunities for the United States and for the world but … its policies are a growing source of concern both here and in countries around the world."

The policies themselves are harmful, yes. But hiding those policies adds an extra layer of frustration.